A Wave of Protectionism? An Analysis of Economic and Political Considerations
AbstractIn light of the U.S. current account deficit, pressure is high on Asian countries to revalue their currencies. The calls from some U.S. policymakers for tariffs on imports from China has sparked fears that this could trigger a world-wide surge in protectionism. This study evaluates the risk of protectionism, considering two dimensions: first, the economic effects of tariffs; second, the incentives for policymakers to adopt tariffs. Following the political economy literature, we distinguish 'benevolent' policymakers - who care about long-term GDP - and 'myopic' policymakers, for whom short-term considerations are important. An analysis of the economic effects using the Bank of Canada's Global Economy Model shows that the gains from import tariffs are small: in the short-term, tariffs raise the price of imports and shift consumption toward domestically-produced goods; but they also lead to a real appreciation. This improves the terms of trade, but falling export volumes lead to a reduction in GDP in the long-run. As regards the political dimension, we conclude that a 'benevolent' policymaker would not adopt tariffs, because of negative long-term economic consequences, but 'myopic' policymakers might be tempted to exploit short-term political gains. Given the potentially high costs of protectionist trade policies, protectionism is therefore rightly viewed as an important risk.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 08-2.
Length: 41 pages
Date of creation: 2008
Date of revision:
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International topics; Recent economic and financial developments; Regional economic developments;
Find related papers by JEL classification:
- E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-09 (All new papers)
- NEP-INT-2008-02-09 (International Trade)
- NEP-MAC-2008-02-09 (Macroeconomics)
- NEP-POL-2008-02-09 (Positive Political Economics)
- NEP-SEA-2008-02-09 (South East Asia)
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